A Fusion of Fact and Feeling

What a crazy, crazy week! It started with a release that didn’t materialize and ended with a false print on Bloomberg that made us exit a trade early. In between we made money on data that printed completely opposite of our expectations while lost money on data that printed exactly as we forecast.

Let’s just recount the absurdity in full detail.

On Sunday we traded Australian :LEI data, but guess what? At the very last moment the report was pulled from the calendar, delayed for no stated reason and we scrambled to get out before the AUDUSD long hit our stop.

On Monday we traded the NZDUSD surmising correctly that the Trade Balance would be weak. However, the kiwi showed no reaction to the news and we exited 15 minutes later only to watch the unit fall apart all night long as hawkish commentary from BOJ officials triggered a round of carry trade liquidation.

On Tuesday we traded the KOF which was the only “normal” release of the week, as the data failed to meet our forecasts and we exited the trade at scratch.

On Wednesday we traded the Durable Goods orders and couldn’t have been more wrong on our call but managed to bank 14 points on the trade nevertheless as pre-release price action went our way.

On Thursday we traded CAD Raw materials data and banked 56 points even though the data was much cooler than we projected. Merger and acquisition demand for Canadian companies trumped all other factors that day and gave us the best winner of the week.

Finally Friday the NZD GDP which we thought might beat simply matched the relatively strong expectations and according to our rules we exited the trade with a tiny 4 point loss before it fluttered 25 points lower.

But perhaps the strangest trade of the week came in the middle of the night on Friday. We traded the UK GFK Consumer confidence survey which we expected the be worse than the –3 expected. The release was due at 5:30 AM EST. Suddenly at 5:15 AM EST Bloomberg printed the number as +2. We immediately send out an alert to exit at scratch. At about 5:29 AM EST Bloomberg took the +2 print off the screen and posted a reading of –3. The GBPUSD did not react either way and in retrospect our exit was fortunate as GBPUSD eventually rose materially for the rest of the day.

The net takeaway from all of these misadventures is that if you are not willing to suffer the folly of human foibles don’t trade. Governments will pull releases, news agencies will post false readings, traders may not react to the news as intended. This is all part of the “reality based” trading that we share with you every week. If you want the precision of a profession such as electrical engineering don’t trade. Trading is about feelings first and facts second. That is why we focus so keenly on risk control. Markets are always chaotic and will remain unpredictable in ways no one can ever imagine, but our response to them as traders does not have to be impulsive. It is not the trade that matters in trading, its our reaction to it.

Thus despite the trials and tribulations of the week we are up 36 points and up 138 points for the month of June. More importantly since the start of May when we went full time to our event risk model we are up 493 points with the largest drawdown of 155 points meaning that we’ve earned about 5 dollars of profit for 1.5 dollars of risk. While there is absolutely no guarantee that such favorable odds will continue, it does show that this method of trading is robust and certainly validates our risk control approach.

Next week is July 4^th – we’ll be off that day, but the rest of the week will busy and we look forward to having you join us in our trades.

Have a great week-end

B&K